Q:  My spouse and I plan to file for divorce. Should I file bankruptcy first or should I wait to begin the divorce proceeding until after filing for bankruptcy?

A:  Unfortunately, every case is different. The specifics of each case must be considered to determine whether divorce proceedings should be initiated before or after filing for bankruptcy.

If both spouses are agreeable to the divorce and its terms, the bankruptcy case can be filed and finalized first to simplify the divorce. The spouses can file a joint bankruptcy to wipe out all community and separate debt. A joint bankruptcy is cheaper than two separate bankruptcy filings since only one [joint] case is filed. The bankruptcy case can also be filed after the uncontested divorce, however, the parties will have to file separate bankruptcy cases. The decision to file the bankruptcy case first in the case of an uncontested separation is merely driven by monetary and convenience considerations.

If the divorce is contested, finalizing the divorce before filing for bankruptcy is generally recommended. The judge must divide community property and debt in a divorce proceeding. The divorce decree will clearly set forth the debts that each spouse will be responsible for as well as the assets that will be awarded to each spouse after the divorce. Thus, by waiting until after the divorce is finalized, each spouse will know exactly what debts he or she seeks to discharge within the bankruptcy and what property interests (assets) that he or she must disclose within the bankruptcy petition.

Care must be exercised when divorce and bankruptcy converge. Debts relating to a divorce or property settlement are non-dischargeable pursuant to 11 U.S.C. §523. Also, child support and alimony are considered non-dischargeable pursuant to the United States Bankruptcy Code. Thus, bankruptcy is only advantageous if additional debt unrelated to the divorce exists or the debt to be discharged is not collectible against the non-filing, co-signor spouse. In the event that the non-filing spouse is jointly liable as a co-signor on some debt, the bankrupt spouse by declaring bankruptcy on it would be in contempt of the divorce decree which requires him or her to pay that debt. After the bankruptcy, creditors would resort to collecting from the non-filing, co-signor spouse, putting the filing spouse into contempt for failing to pay the obligation required by the divorce decree.

It is often best to specifically address the proposed bankruptcy filing within the divorce decree to alert the judge that one or both parties will need the benefits of a fresh start after the divorce. Also, by specifically addressing this issue, both parties are encourage to file for bankruptcy relief. In contested divorces, however, the proceedings may not be amicable and may continue for a lengthy period of time. The lack of cooperation, likelihood of non-dischargeable debts, and possibility of delays in contested divorces may force a party to the divorce to file for bankruptcy before the finalization of the divorce.

Care must be taken and legal advice sought if a bankruptcy filing is contemplated during a divorce proceeding. In many divorces, a Joint Preliminary Injunction (JPI) is ordered by the court and has the effect of freezing all assets in the marriage. The JPI prevents either spouse from destroying, damaging, transferring or encumbering any community property. The filing of a bankruptcy during the divorce would violate the JPI and put the offender in contempt of a court order.

It is in the bankrupt’s best interest, however, to list debts incurred during the marriage even if the non-filing spouse is required to pay the debts pursuant to the divorce. Doing so is merely an additional precaution. It is common for creditors to ignore the divorce decree’s allocation of debt to the other spouse. These creditors could be blissfully ignorant or may dispute the validity of the divorce decree. For this reason, err on the side of listing the debt.

Please note that any transfers of property, real or personal, occurring within the two year period prior to the bankruptcy filing must be disclosed within the bankruptcy petition. If a transfer of property is required pursuant to the divorce decree, such as transfer of spouse’s interest in the marital residence by quitclaim deed, it is best to complete the transfer prior to the bankruptcy filing. Otherwise, the spouse filing for bankruptcy must list the partial ownership interest in the property and disclose the asset on the bankruptcy paperwork. The case may become more difficult as a result since the assigned trustee may claim an interest in the property.

The post-divorce transfer must be disclosed within the bankruptcy schedules. Since the transfer was made pursuant to a court order, the bankruptcy case will generally proceed without complication. Trustees have authority, however, to set aside (undo) transfers that occurred without reasonably equivalent value or that were fraudulent or unfair transactions. Most post-divorce transfers are not questioned. In a few rare cases, a trustee successfully set aside post-divorce transfers that were based on grossly inequitable and one-sided divorces.

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